Holistic Financial Planning: Where does tax-efficient investing fit in? FOR THE USE OF PROFESSIONAL ADVISERS ONLY AND NOT TO BE RELIED UPON BY RETAIL CLIENTS BEFORE WE START, PLEASE REMEMBER: This presentation is intended for professional advisers only and must not be relied upon by retail clients. This promotion does not offer investment or tax advice. Investors capital is at risk and they may not get back the full amount invested. Past performance is not a reliable indicator of future results and any forecast is not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs also depends on the portfolio companies maintaining their qualifying status. Unquoted investments or those quoted on AIM are likely to have higher volatility and liquidity risk than shares quoted on the main market of the London Stock Exchange. Regarding VCTs, this advertisement is not a prospectus and investors should only subscribe for shares on the basis of information in the prospectus, which can be obtained from octopusinvestments.com. Information is current as at 27/08/2015 and is sourced to Octopus Investments Limited, unless otherwise stated. This financial promotion has been issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. 33 Holborn, London EC1N 2HT T: 0800 316 2067 www.octopusinvestments.com 1
LEARNING OBJECTIVES Refresher on the tax reliefs, structure, risks and benefits associated with Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Business Property Relief (BPR) Following the pension changes, a look at the role now played by these solutions An understanding of where these solutions fit in alongside traditional investment and retirement planning A range of client case studies to bring these solutions to life, from wealth preservation to decumulation The means of identifying existing and prospective clients who may benefit, along with ideas to discuss with new clients and professional connections THE CHALLENGE People living longer - over 85s fastest-growing market segment * Clients could be in retirement for over 30 years Need to preserve capital but also provide an income IHT planning balanced with complex and changing circumstances Legislative changes and anti-avoidance rules Investment and tax decisions to be made pre and post retirement *Source: www.transgenerational.org Source: www.thisismoney.co.uk 2
WHY IS THIS IMPORTANT? Clients have a genuine need for advice in a complex area Tax-efficient investments could complement retirement planning Planning that your clients will really value If you don t tell your clients will somebody else? THE CHANGES MARK A FURTHER MERGING OF RETIREMENT PLANNING AND INVESTMENT PLANNING. Tony Wickenden, Managing Director, Technical Connection RETIREMENT PORTFOLIO? Pensions ISA Collectives Insurance Property (buy to let) Cash VCT EIS Other 3
A LIFETIME OF PLANNING A NOTE ON THE FOLLOWING SCENARIOS The following client tax scenarios are designed to assist you in developing your own client strategy where appropriate. Among other things, you will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the products(s) represented and/or any specific product you have chosen. These products are high-risk investments and have a higher risk profile than typical pension investments; they are therefore only suitable for certain investors who can tolerate the risks associated with smaller company investments. For most clients, tax-efficient investments such as these products will make up no more than a small proportion of their overall portfolio. For more details, please see the relevant product literature. Our examples are for illustration purposes only and assume no loss or gain on the investments, although fluctuations will apply in practice. The tax situation should be assumed as is stated. For the calculations used we have assumed that the Lifetime Allowance is fixed at 1.25million.* The effects of inflation have not been taken into account. Unless stated calculations are based upon the investor being a higher-rate taxpayer. *From April 2016, the amount an individual can receive from their pension schemes over their lifetime (their Lifetime Allowance ) will be reduced to just 1 million. 4
A LIFETIME OF PLANNING 40s & 50s 60s 70s 80s 90s LANDLORD INCOME IN THEIR 40s & 50s VCT Mr and Mrs Davies, Cardiff For illustrative purposes only. Their situation: Both aged 55, intending to retire at 65 Mr Davies is higher-rate taxpayer with adequate pension provision Mrs Davies has a significant property portfolio to supplement her income in retirement Earning 30k rental income, 6k income tax liability Their action: Invest 20k in VCT Years 1-5 Self-funding opportunities from Year 6 What worked for them: Potential for regular tax-free dividends from VCT Offset income tax ( 6k reclaim each year) Comfortable with risk and time horizon Their adviser s view: Comfortable with increased risk Part of wider financial plan Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s) represented and/or any specific product you have chosen. 5
BUSINESS OWNER PROFIT EXTRACTION IN THEIR 50s and 60s VCT or EIS Mr Gilbert, Norwich For illustrative purposes only. Their situation: Company Director currently receiving income of 50,000 per year (assumes 40% taxpayer) Additional profit in company of 40,000 that he would like to extract Requires a tax-efficient method of extraction Their action: Extracted 40,000 dividend 35,000 invested into VCT/EIS, providing 10,500 income tax relief 5,000 tax-free cash available Their adviser s view: Client comfortable with increased risk No immediate need for cash as part of longer-term plan Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s) represented and/or any specific product you have chosen. A LIFETIME OF ISAs IN THEIR 60s AIM IHT ISA Mr Carr, Newcastle upon Tyne For illustrative purposes only. Their situation: Fairly wealthy, concerned about IHT liability Has over 100k in ISAs Their action: Both he and his wife transferred their existing ISAs into AIM IHT ISA What worked for them: Growth opportunity of AIM companies Reducing IHT liability Their adviser s view: Comfortable with increased risk See as long term Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s) represented and/or any specific product you have chosen. 6
SALE OF A BUSINESS IN THEIR 60s OITS His situation: Sold BPR-qualifying company for 6million Moderate IHT issue became very large His action: Invested 3million into OITS What worked for him: Benefited from Replacement Property Relief, so immediate IHT relief His adviser s view: Immediate IHT exemption was important Mr Andrews, Shrewsbury For illustrative purposes only. Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s) represented and/or any specific product you have chosen. PLANNING WITH ILLIQUID ASSETS IN THEIR 70s EIS Note: 1 Claimed once EIS 3 certificates received; Their situation: Asset valued at 350,000, original cost 250,000 Would like to sell but CGT an issue ( 28k at higher-rate tax) Some IHT concerns Their action: Sold asset, invested 100,000 gain in EIS What worked for them: Deferred CGT and <30% Income Tax Relief 280,000 invested in adviser portfolio or complementary IHT solution ( 250K original investment + 30K income tax relief 1 ) Business Property Relief on holding provided shares held for 2 years and at time of death Comfortable with lack of access and liquidity Their adviser s view: Comfortable with increased risk Part of longer-term financial plan For illustrative purposes only. Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the products(s) represented and/or any specific product you have chosen. 7
POWER OF ATTORNEY IN THEIR 90s OITS Mrs Jenkins and her son, Winchester For illustrative purposes only. Their situation: Son had Power of Attorney (POA) over mother s estate POA restrictive in terms of gifts and trust transfers Their action: Invested 120k into OITS What worked for them: Able to invest for IHT exemption while preserving capital for beneficiaries and still allowing mother access* Their adviser s view: Very pleased to have a solution for POA situations Utilises with solicitor connections *Access is subject to liquidity being available Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the products(s) represented and/or any specific product you have chosen. GENERATIONAL PLANNING END OF LIFE OITS/ AIM ITS The Barrett Family, Edinburgh For illustrative purposes only. Their situation: Mother passed away holding 850k in OITS Left to her 3 adult children in her will Their action: Transferred OITS into AIM ITS in beneficiaries name What worked for them: Planned to pay IHT directly to HMRC from investment but already exempt No initial charge to transfer to growth version for beneficiaries and maintain IHT-exempt status Their adviser s view: Previously unaware of the benefits of retaining for beneficiaries Assumes no gains or losses on investments. You will need to consider the eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the products(s) represented and/or any specific product you have chosen. 8
RETIREMENT PLANNING OPPORTUNITIES: CLIENTS TO CONSIDER Those currently investing more than 40k a year Clients who have applied for fixed protection Professionals with final salary pension schemes, e.g. doctors and dentists Clients with property rental income High-earning clients with low retirement ages, e.g. professional sportspeople Those who have already exceeded the LTA Clients in pension drawdown Those whose assets exceed the nil rate band ABOUT OCTOPUS Est. 2000 OVER 3,000 ADVISERS HAVE RECOMMENDED US TO 50,000 INVESTORS OVER 5b AUM Awarded 5* Investment Provider & Packager at Financial Adviser Service Awards 2014 supported over 450 smaller businesses More than 399 employees including 80 investment professionals Largest provider of EIS in the UK Source: Octopus Investments, 1 July 2015. Source: Tax Efficient Review, 2014 9
HOW DO WE WORK WITH ADVISERS? ONE We share a planning idea or concept TWO Bring that idea to life by applying it to a live situation in your client bank THREE We can provide close support up to and at your client meeting Business Development Managers in the field, supported by office-based counterpart Generic case studies including pensions-focused Product literature Planning ideas Reasons Why proformas Webinars Attend client meetings For professional investors only. Not to be relied upon by retail investors. We do not offer investment or tax advice. We recommend you seek professional advice before deciding to invest. REMINDER OF LEARNING OBJECTIVES Refresher on the tax reliefs, structure, risks and benefits associated with Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Business Property Relief (BPR) Following the pension changes, a look at the role now played by these solutions An understanding of where these solutions fit in alongside traditional investment and retirement planning A range of client case studies to bring these solutions to life, from wealth preservation to decumulation The means of identifying existing and prospective clients who may benefit, along with ideas to discuss with new clients and professional connections 10
OCTOPUS IS HERE TO HELP If you have any questions or need any help after today s event, please call us on 0800 316 2067 More information is available at www.octopusinvestments.com Appendix 11
HOW DO EIS AND VCTs COMPARE? VCT EIS INCOME TAX RELIEF * MINIMUM TERM MAXIMUM INVESTMENT MINIMUM INVESTMENT DIVIDENDS GROWTH CGT DEFERRAL IHT EXEMPTION (BPR) LOSS RELIEF Up to 30% 5 YEARS 200,000 5,000 TAX EXEMPT TAX EXEMPT Up to 30% 3 YEARS 1 1m (plus 1m carry back) 25,000 TAXED TAX EXEMPT YES NO MAXIMUM AFTER 2 YEARS YES 1 Minimum holding period is 3 years but given the nature of unquoted stocks, investors should expect to hold for around 4 years. Minimum investment relates to Octopus products. The investment will be subject to an initial fee and ongoing fees, including administration fee and an annual management charge. *Tax relief is on investments up to 200,000 (VCT) and 1,000,000 (EIS) in a tax year and assuming shares are held for five and three years, respectively. EIS STRUCTURE Investment company A Tax certificate k Investment + fees* Discretionary portfolio Investment company B Investment company C Tax certificate Tax certificate 25 For illustration purposes only. *The investment will be subject to an initial fee and ongoing fees and an annual management charge. 12
VCT STRUCTURE k Investment* A share Portfolio company A Portfolio company B VCT COMPANY Portfolio company C Portfolio company D Tax certificate Charges paid to Octopus and advisers / intermediaries* *For illustration purposes only. Each investment will be subject to an initial fee and ongoing fees, including administration fee and an annual management charge. Charges paid by a VCT. 13